Written by Hugh Goodwin
After a slew of negative publicity and business community backlash in the wake of the June 2015 issuance of Lease Tax Ruling #12, the Chicago Department of Finance has offered relief for prior non-payment of the Chicago Lease Tax, provided that a voluntary disclosure application is filed with the Department by January 1, 2016.
In Legal Ruling #12, the Department expressed its position that payments for the Chicago use of software as a service products and other cloud computing transactions are subject to the tax. The tax is imposed at the rate of 9 percent on taxable receipts.
The Chicago statutes impose the Lease Tax on payments for “the lease or rental in [Chicago] of personal property,” or “the privilege of using in [Chicago] personal property that is leased or rented outside” of Chicago. Furthermore, a “nonpossessory lease” whereby “the customer obtains access to the provider’s computer and uses the computer and its software to input, modify or retrieve data or information” is considered to be a lease or rental. According to the Department, a nonpossessory computer lease extends to any usage in Chicago “of remote computing or software, including but not limited to SaaS, IaaS and PaaS, such as (a) automated deployment of servers, processing power and networking, (b) software applications accessed remotely such as office suite software, project management software and customer relationship management (CRM) software, (c) web hosting, and (d) database search products.”
Although certain customer support services are not subject to the tax, the Department further noted that “simply because a product is described as a ‘service’ or has the word ‘service’ in its title does not mean that it would be treated as a service for purposes of the Lease Tax (or other taxes).” See Information Bulletin (Chicago Department of Revenue, November 19, 2015).
The tax “is imposed on the customer (the lessee), but the provider (the lessor) is required to collect” the tax. Providers must have nexus with Chicago, however, in order to incur a tax collection obligation. Accordingly, service providers located outside of Chicago but who have Chicago customers must determine if their connections to Chicago create a Lease Tax collection obligation. If so, the service provider should strongly consider submitting a voluntary disclosure application.
The terms of the Department’s voluntary disclosure offer for nonpossessory computer leases provides for a one-year look-back period that encompasses the 2015 calendar year only. The offer further includes the waiver of interest and penalties for 2015. Taxpayers must otherwise be eligible for voluntary disclosure in order to take advantage of the Department’s offer. Such eligibility requires, among other things, that the taxpayer not have previously received notification from the Department that the taxpayer is the subject of an audit or investigation.
Other provisions set forth in the November Information Bulletin include the adoption of a Small New Business Exemption that may provide relief for some taxpayers and a reduced tax rate of 5.25 percent effective January 1, 2016, for certain cloud computing services.